We have to undertake some effort to get what we want. Fish don't leap out of rivers and fall, tastily cooked, onto our plates. As economies advance, things get more complex and interconnected; there are more options — but that doesn't change the basic fact that human labor is the means by which we satisfy our desires. The question is: why do people work so hard for such meager rewards?
Technological progress has enabled people to produce far more wealth with the same amount of labor. But since the nineteenth century, as the effects of the industrial revolution were felt throughout society, economists have held that wages for average workers tend toward bare subsistence: no more than workers need to survive and keep coming to work.
The "Wages Fund Theory" was frequently offered to explain this. It was prevalent in Henry George's day, which is why he devoted considerable space to it in Progress and Poverty. But even today some offer it as an explanation for poverty or arrested economic development. The basic idea of the Wages-fund theory is that before large numbers of workers can be employed, a fund of capital must be stored up to pay their wages. Because work takes time to perform, the thinking goes, money must be available to pay the workers before the product is finished and sold.
The utilization of steam and electricity, the introduction of improved processes and labor-saving machinery, the greater subdivision and grander scale of production, the wonderful facility of exchanges, have multiplied enormously the effectiveness of labor.
It was natural to expect, and it was expected, that laborsaving inventions would lighten the toil and improve the condition of the laborer; that the enormous increase in the power of producing wealth would make real poverty a thing of the past....
Now... we are coming into collision with facts which there can be no mistaking. From all parts of the civilized world come complaints of... labor condemned to involuntary idleness; of capital massed and wasting... of want and suffering and anxiety among the working classes. There is distress where large standing armies are maintained, but there is also distress where the standing armies are nominal; there is distress where protective tariffs are applied, but there is also distress where trade is nearly free; there is distress where autocratic government yet prevails, but there is also distress where political power is wholly in the hands of the people... Evidently, beneath all such things as these there is a common cause, not arising from local circumstances but in some way or another engendered by progress itself.
This association of poverty with progress is the great enigma of our times. It is the central fact from which spring industrial, social, and political difficulties that perplex the world.... It is the riddle that the Sphinx of Fate puts to our civilization, which not to answer is to be destroyed. So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.
— Henry George, Progress and Poverty
Does this make sense? Superficially it seems to — but simple logic can show us that it does not.
When one gains wealth directly from applying one's labor on the land, as in fishing or gathering fruit, wages are obviously the result of one's own labor. When a worker is paid with a percentage of what he produces, like a fisherman who takes a percentage of the catch, or a woodsman who keeps some of the firewood he cuts, his wages are the result of his own labor. When workers are paid with money, the result is no different from paying wages in kind. Labor always precedes the payment of wages.
When a worker is engaged in a long-range enterprise like building a high-rise building, the product cannot be exchanged each week as the worker is paid. However, the employer's capital is never lessened by the payment of wages. The workers' ongoing efforts add to the value of the building. The product of labor stands in place of the wages paid.
We live on production currently in progress. Some workers are producing food while others are building skyscrapers. If everyone stopped producing altogether, how long could our economy continue? Every day, food is grown, transported, traded and consumed — in exchange for the value added to the partially completed building.
A lack of capital is often observed in impoverished, or "less-developed," countries (LDCs). Many of these countries borrowed huge sums for "capital development projects" that, it was thought, would help their economies become competitive. Most of these projects yielded very little improvement, and left behind crushing foreign debt burdens. Why? Typically, a small group of people controlled most production in these countries. These elites often used the borrowed funds in corrupt or short-sighted ways. Often, governments tax or regulate production so much that it grossly reduces the incentive to invest. In other cases governments may not be able to protect modern capital investments from fraud or theft. The lack of capital in impoverished countries is one of the symptoms of poverty, but does not fully explain its cause.
In advanced countries poverty clearly cannot be explained by a lack of capital. During times of recession or depression, unemployment and poverty coexist with an excess of capital. Buildings and machinery often sit idle and deteriorate, even as poverty and slums are increasing.
Video Supplement for this lesson
Furthermore, some nations have progressed rapidly, starting from a similarly "backward," agrarian level of production to the LDCs. They were able to produce the capital goods they needed to modernize and expand. Some, such as Japan, Taiwan or Denmark, did so despite very modest endowments of natural resources.
Evidently, an outright lack of capital cannot be the reason for persistent poverty, or for the failure to develop.